Serious Question

Kevster

Hi everyone,

I have a genuine question that I want to ask. I'm not stupid or dumb but I just have developed my career into the Biological sciences - i.e. nowhere near economics. My question is why can't every nation just 'erase' the debt that exists and then start afresh? Okay, I know that this can't be done, but WHY can't it be done? I genuinely don't understand it.

Kevin

You can erase soverign debt, and it is done (remember the Drop the Debt campaign?), but it makes it harder to borrow again in the future. Think of it this way, you have two friends, both are looking for money. One has borrowed before and paid back promptly, the other has borrowed before and never paid back. Who will you lend to?

(Any one here doing International Economics in Trinity? Philip Lane gave us a good seminar on this last year, did he do it again this year?).

It is harder to erase corporate debt as you then subject to a legal system which will seize your assets in order to pay of your creditor. So even if you don't pay, you will still suffer consequences.

Time Magazine

Kevster wrote: »

Hi everyone,

I have a genuine question that I want to ask. I'm not stupid or dumb but I just have developed my career into the Biological sciences - i.e. nowhere near economics. My question is why can't every nation just 'erase' the debt that exists and then start afresh? Okay, I know that this can't be done, but WHY can't it be done? I genuinely don't understand it.

Kevin

It'd be a bit scabby to the banks that were nice enough to lend their governments money.

Économiste Monétaire

Your liability is my asset?

Kevster

... ..banks lend governments money? Hmm, why do I get the feeling that this problem with the global economy is the result of sheer incompetence, overindulgence, and greed?

zaraba, I don't understand your last comment about erasing corporate debt. Could you explain a bit further?

Thanks,
Kevin

Économiste Monétaire

He's talking about collateral. Like when you don't pay your mortgage, you become a person without a fixed abode. Government bonds/paper are unsecured debt, you can't come to Ireland and take a hospital if we don't pay.

Banks purchase our debt, as do other institutions and private persons. Take a look at our recent bond issuance here.

Économiste Monétaire

Économiste Monétaire wrote: »

He's talking about collateral. Like when you don't pay your mortgage, you become a person without a fixed abode. Government bonds/paper are unsecured debt, you can't come to Ireland and take a hospital if we don't pay.

Banks purchase our debt, as do other institutions and private persons. Take a look at our recent bond issuance here.

It used to be the case where you could send a gun boat! But that hasn't been done in a while....!

Kevster

You guys don't seem to understand that I've absolutely no footing in economics at all. I won 'student of the year', but for science, not economics. I don't have a ****ing clue what bonds are, for example.

P. Breathnach

Kevster wrote: »

You guys don't seem to understand that I've absolutely no footing in economics at all. I won 'student of the year', but for science, not economics. I don't have a ****ing clue what bonds are, for example.

Even a science specialist understands the idea of IOUs. You borrow €50, and you give the lender a note saying that you owe it, and when you will pay it back. A government borrows €500,000,000, and gives the lender a note to say that they owe it and when they will pay it back.

You can add on a couple of details, but that's the core idea.

Time Magazine

Kevster wrote: »

I don't have a ****ing clue what bonds are, for example.

In very simple terms: The government will spend about €79bn this year, but only get €60bn in tax. This is the famous €19bn deficit that everyone is talking about. This doesn't come out of thin air. Some of this will be paid from what the State has saved and keeps under the mattress. The rest of it has to be borrowed. The easiest way to imagine where it comes from is they ask some big bank to lend them a few quid and they'll pay them back later. The total amount owed is the national debt. Defaulting on the national debt (what you suggested, just cancelling the debts) would mean saying to poor old Deutsche Bank "Eh lads, you know that €2bn you lent us there last year? Yeah, well, we're not paying it back." You don't get very far with that approach.

Now this is a way too over-simplified version, but that's the jist of it, and it's the reason you can't just cancel the debt.